I. Field of the Invention
The present invention generally relates to financial systems and to systems and methods for validating a model. More particularly, the invention relates to systems and methods for validating a financial model where a mortgage security issuer can ensure that all cash flows for all securities in a transaction match the corresponding cash flows generated by the underwriter of the corresponding securities, so that the mortgage security issuer can settle trades and accurately pay investors.
II. Background and Material Information
Mortgage securities represent an ownership interest in mortgage loans made by financial institutions to finance a borrower's purchase or refinance of real estate or other collateral. Mortgage securities are created when these loans are packaged or pooled by issuers for sale to investors. As the underlying mortgage loans are paid down by the homeowners, the investors receive payments of interest and principal. The most basic mortgage security, referred to as a “pass-through security,” represents a direct ownership interest in a pool of mortgage loans. A plurality of mortgage securities may be pooled to serve as collateral for a more complex type of mortgage security known as a Real Estate Mortgage Investment Conduit (REMIC).
A REMIC is a multiclass, mortgage-backed security in which cash flows from the underlying collateral (e.g., a pool of pass-through securities) are allocated to individual groups of bonds, called tranches, of varying maturities, coupons, and payment priorities. Each REMIC includes a set of two or more tranches, each having average lives and cash flow patterns designed to meet specific investment objectives. These tranches are distinguished by their sensitivity to the prepayment risk of the underlying mortgage-related collateral. Therefore, they may have different sensitivities to prepayment risk, bear different interest rates, and have different average lives and final maturities.
REMICs offer investment flexibility because each REMIC may be designed according to specific investor needs or general market demand. As such, an underwriter of the REMIC can provide the issuer of a REMIC with a proposed deal structure before the issuance of the REMIC. It is the responsibility of the issuer to take that structure and validate it for accuracy, e.g., that the cash flows are appropriately allocated across tranches and groups and that there is nothing about the structure that the issuer cannot accurately disclose. Additionally, the underwriter validates that the issuer should be able to settle any trades on a timely basis and accurately make monthly payments to investors after any bonds in a REMIC are sold.